Friday, March 23, 2012

And more depressing news.....

Statisticians have apparently found that the amount of drilling for oil is not positively correlated with lower prices at the pump. Part of this is intuitive; if you are fishing for funds to drill an oil well, are you going to do better with the venture capitalists and bankers when the spot price is $25/barrel, or $150/barrel? At which price point are more marginal U.S. oil wells going to be brought into production?

At the higher price point, of course, which illustrates the lack of logic in the AP study. Yes, more suppliers will join a market as the market clearing price goes up. It is exactly what anyone who has made it through the first two weeks of an introductory economics course would understand from a normal supply and demand illustration.

The same illustration illustrates why the AP's research is meaningless; from the very same illustration, let's move the supply curve out by adding more producers. What happens to the market clearing price? It of course goes down versus what it otherwise would have been, ceterus parabus.

Which leads to the basic question; what kind of change in supply is indicated here, the use of already existing oil wells, or the opening of new oil fields for exploration? Since it is the latter, any sound economist will tell you that yes, opening up new oil fields to exploration will indeed reduce oil prices versus what they otherwise would have been.
Or, at the very least, they will compel OPEC to reduce production to maintain prices, which will still have the beneficial impact of reducing the amount of money going to some of the world's most corrupt leaders. I hope we can all agree that, even if we're still stuck paying $4/gallon or more for gasoline, this is a good thing.